mrmarket
12-08-2006, 11:17 AM
When my friend, Spike, decided to get married, Titan Omega decided it was his civic responsibility to host a bachelor party in Spike’s honor. I skipped work that day and drove down to Philly for the party. On the way, I stopped in a package store to get the appropriate beverage. Since everyone else was getting beer, I thought I’d be different and bring a bottle of Peppermint Schnapps. They had a brand at this store called. “Steel”. Here’s a picture of what happens to you when you drink Steel:
http://i4.ebayimg.com/05/i/08/7e/29/f3_1_b.JPG
Anyway, the party was a big success, but no one drank the Steel. In fact, the only thing I remember from that party was that Jimmy Mac fell on a garbage bag that was full of ice, cups and trash. This twisted memory of Steel was not enough to discourage me from investing in a steel company which I believe will be the next $$$MR. MARKET$$$ winner.
Today I bought Chapparal Steel (CHAP) at 47.20. I will sell it in 4 to 6 weeks at 54.38. Here’s what I like about CHAP:
CHAP’s stock is up 278% in the last 12 months yet its PE is only 11.8. Look at this beautiful chart. It is moving up, unhindered, unencumbered, like a stairway to the stars. So beautiful it makes me want to cry.
http://chart.finance.yahoo.com/c/1y/c/chap
The steel industry is a fun place to play. Recent takeover announcements and speculation have driven equity prices as of late. An article in Russia's Kommersant newspaper reported that Severstal planned to create a $20 billion company together with ore producers to position itself to bid on U.S. Steel. Meanwhile, Brazilian steelmaker CSN laid an offer on the table Friday for Britain's Corus Group PLC, offering about $8 billion to top a rival offer from India's Tata Steel Ltd. for Corus valued at about $7.7 billion.
The forces behind all the recent wheeling and dealing are the same. On the supply side, providers of coking coal, iron ore and scrap steel are consolidating. As suppliers grow bigger, larger buyers earn better deals. So steel buyers - particularly steel service centers and fabricators - are consolidating as well. As they do, they look to concentrate purchases among fewer and larger steel makers. Pretty soon all of these companies will merge, and there will only be one buyer and one seller. Then the buyer will buy the seller, and there will only be one company left on the planet – Google.
Actually, much of the M&A activity is a response to China's steel market. Vast expansion of Chinese steel consumption has pushed prices of steel, scrap, iron ore and coking coal far above historical levels.
Chapparal Steel has some very solid fundamentals behind its stock price appreciation. Chaparral Steel Company produces structural steel and steel bar products in North America. Its structural steel products include wide flange beams, channels, piling products, and other shapes. The company’s steel bar products comprise specialty bar products and reinforcing bars. It manufactures approximately 230 different types, sizes, and grades of structural steel and steel bar products. The company serves steel service centers and steel fabricators for use in the construction industry, cold finishers, forgers, and original equipment manufacturers for use in the railroad, defense, automotive, manufactured housing, and energy industries.
Chaparral’s management has dedicated themselves to focus on low costs and their core business and, as a result, they now enjoy strong free cash flow generation from the runup in steel prices. They have been increasing shareholder value through strong deleveraging and increased capacity utilization. There is no doubt that there will be some share repurchases in the works soon.
CHAP has driven down costs by deploying on-site shredding operations at their plants to use scrap metal and generate significant raw material cost savings. In fact, Chaparal has the largest single-site shredders in North America. Remember the Evil Shredder in the Teenage Mutant Ninja Turtles? Mmmmmm pizza. Chaparral operates on a non-union basis, so you don’t have one guy leaning on a shovel, one guy drinking coffee and one guy operating the equipment. What's more, the company has relatively new machinery and so has lower ongoing capital investment needs for the near future.
CHAP is the 2nd largest producer of structural steel in North America and is a major producer of steel bar products (you know the giant girders that go into office buildings and skyscrapers). The company produces about 2.5 million tons of structural steel and bar products annually. Structural steel products account for three-fourths of Chaparral Steel's sales. Former parent Texas Industries, Inc., (TXI) spun off Chaparral Steel to shareholders in July 2005.
These bar products are used for non-residential construction and also for piledriving. Remember when Jesse “The Body” Ventura was a wrestling commentator and some kids ran in the ring to high-five Paul “Mr. Wonderful” Orndorff? Jesse had the famous quotation, “What’s he gonna do McMahon, piledrive the kid?”.
There are only 3 North American producers of structural steel (Chaparral, Nucor and Steel Dynamics) and the market isn’t going to fragment any time soon. With this industry consolidation has come the focus on profitability rather than capacity utilization. So the market is not oversupplied. Combine this with the weak US Dollar, higher international transportation costs and strong international demand and the threat of any imports flooding the market is minimized. Indeed, international structural steel prices have risen dramatically as well.
With office vacancies beginning to tighten, and highway construction making new opportunities for more office space, it’s likely that non-residential construction in the US is going to pick up. On the Gulf Coast, post-Katrina projects are being bid to get into the rebuild mold and these new projects will hit Chaparral’s books. Already CHAP’s backlogs are extremely high and they don’t expect them to change.
Consistent with all that, of course, will be the growing demand for structural steel. The piling business is still very attractive and the market is still growing. CHAP’s margins for piling are better than they are for the other products.
So it looks like the stars are lining up for old Chaparral. What does this mean when it comes to earnings? Chaparral Steel Company reported record net income for its first quarter ended August 31, 2006 of $59.1 million, $1.23 per diluted share. This represents an increase of $41.3 million compared to net income of $17.8 million ($0.39 per diluted share) for its first quarter of fiscal 2006 and is $2.9 million better than the previous record of $56.1 million ($1.16 per diluted share) set in the last quarter of fiscal 2006. Record operating profit of $96.7 million increased 176% compared to the first quarter of fiscal 2006 and exceeded the previous record set last quarter by $2.0 million.
Shipments of 567,000 tons were 6% less than the comparable first quarter and sequential fourth quarter of fiscal year 2006 due to reduced levels of inventory available for sale. Average selling prices for the quarter of $656 per ton increased over 27% and 7.5% from the first quarter and fourth quarter of last fiscal year, respectively. Metal margins of $454 for the quarter were 23% and 7.5% higher compared to the first and fourth quarters of last fiscal year, respectively. The Company ended the quarter with $290 million of cash, cash equivalents and short-term investments. The Company believes that end user demand for its products will remain strong and shipments will primarily be a function of production. Based on current market conditions, net income for the second quarter should be in-line with, to slightly better than, the first quarter and the Company remains optimistic for the remainder of the year.
ANAL-ysts are projecting a second quarter $1.26/share, $4.86 for the year and $4.81 for the next fiscal year. What does $$$MR. MARKET$$$ think? $$$MR. MARKET$$$ thinks that the ANAL-ysts have taken too many piledrivers to the head. While steel prices have come off of their summer highs, they are still 40% higher than they were in the summer of 2005. Based upon where global demand is today and where global prices are, there shouldn’t be much concern for CHAP concerning degradation in pricing. So any sustained prices at these levels are going to generate tons of free cash flow for CHAP and drive up its book value. Since they only plan on investing $25 million in CAPEX, there has to be some kind of big reward coming to shareholders in the near term.
The other thing to remember is that their Virginia plant was at only 71% capacity last quarter and it should run in the low 80’s for utilization for the year. More steel production…more profit. The average price for bar and beam in the first quarter (ending August 2006) was $656/ton. At the end of September, prices went to as high as $680. More production, at a higher price means more gross margin. Compound this with the fact that energy prices came off significantly since August, so production costs must have come down somewhat.
So you’re looking at production of close to 590,000 tons at a price of $680 per ton which would generate a revenue increase of about 10%. This revenue increase, combined with lower energy costs, will generate second quarter earnings of $1.41/share, and annual earnings of $5.33 per share. At today’s PE of 11.8, that would generate a stock price of $62.89, which is well past my sell price. Don’t forget that a share repurchase is certain to come, and that will also drive up share prices.
What does the boss think?
"This is our sixth consecutive quarter of earnings growth and we expect to continue similarly strong results as both domestic and international markets remain solid for structural products," stated Tommy A. Valenta, President and Chief Executive Officer. "Domestic prices for structural products remain competitive with global prices and based on global demand we should continue to maintain healthy margins."
That’s good news for me. Now it’s time for me to pump some steel. See you in the gym.
If you liked this write up, send it on to 4 of your friends. If you’ve read this far, email me back and let me know what you think of this stock pick.
If you like this stock pick, and it works out for you, please visit this site: www.golittletigers.com . These boys are always looking for some assistance from some kind hearted supporters. No donation is too small or too large.
I am HUGE!
$$$MR. MARKET$$$
http://www.mrmarketishuge.com
http://i4.ebayimg.com/05/i/08/7e/29/f3_1_b.JPG
Anyway, the party was a big success, but no one drank the Steel. In fact, the only thing I remember from that party was that Jimmy Mac fell on a garbage bag that was full of ice, cups and trash. This twisted memory of Steel was not enough to discourage me from investing in a steel company which I believe will be the next $$$MR. MARKET$$$ winner.
Today I bought Chapparal Steel (CHAP) at 47.20. I will sell it in 4 to 6 weeks at 54.38. Here’s what I like about CHAP:
CHAP’s stock is up 278% in the last 12 months yet its PE is only 11.8. Look at this beautiful chart. It is moving up, unhindered, unencumbered, like a stairway to the stars. So beautiful it makes me want to cry.
http://chart.finance.yahoo.com/c/1y/c/chap
The steel industry is a fun place to play. Recent takeover announcements and speculation have driven equity prices as of late. An article in Russia's Kommersant newspaper reported that Severstal planned to create a $20 billion company together with ore producers to position itself to bid on U.S. Steel. Meanwhile, Brazilian steelmaker CSN laid an offer on the table Friday for Britain's Corus Group PLC, offering about $8 billion to top a rival offer from India's Tata Steel Ltd. for Corus valued at about $7.7 billion.
The forces behind all the recent wheeling and dealing are the same. On the supply side, providers of coking coal, iron ore and scrap steel are consolidating. As suppliers grow bigger, larger buyers earn better deals. So steel buyers - particularly steel service centers and fabricators - are consolidating as well. As they do, they look to concentrate purchases among fewer and larger steel makers. Pretty soon all of these companies will merge, and there will only be one buyer and one seller. Then the buyer will buy the seller, and there will only be one company left on the planet – Google.
Actually, much of the M&A activity is a response to China's steel market. Vast expansion of Chinese steel consumption has pushed prices of steel, scrap, iron ore and coking coal far above historical levels.
Chapparal Steel has some very solid fundamentals behind its stock price appreciation. Chaparral Steel Company produces structural steel and steel bar products in North America. Its structural steel products include wide flange beams, channels, piling products, and other shapes. The company’s steel bar products comprise specialty bar products and reinforcing bars. It manufactures approximately 230 different types, sizes, and grades of structural steel and steel bar products. The company serves steel service centers and steel fabricators for use in the construction industry, cold finishers, forgers, and original equipment manufacturers for use in the railroad, defense, automotive, manufactured housing, and energy industries.
Chaparral’s management has dedicated themselves to focus on low costs and their core business and, as a result, they now enjoy strong free cash flow generation from the runup in steel prices. They have been increasing shareholder value through strong deleveraging and increased capacity utilization. There is no doubt that there will be some share repurchases in the works soon.
CHAP has driven down costs by deploying on-site shredding operations at their plants to use scrap metal and generate significant raw material cost savings. In fact, Chaparal has the largest single-site shredders in North America. Remember the Evil Shredder in the Teenage Mutant Ninja Turtles? Mmmmmm pizza. Chaparral operates on a non-union basis, so you don’t have one guy leaning on a shovel, one guy drinking coffee and one guy operating the equipment. What's more, the company has relatively new machinery and so has lower ongoing capital investment needs for the near future.
CHAP is the 2nd largest producer of structural steel in North America and is a major producer of steel bar products (you know the giant girders that go into office buildings and skyscrapers). The company produces about 2.5 million tons of structural steel and bar products annually. Structural steel products account for three-fourths of Chaparral Steel's sales. Former parent Texas Industries, Inc., (TXI) spun off Chaparral Steel to shareholders in July 2005.
These bar products are used for non-residential construction and also for piledriving. Remember when Jesse “The Body” Ventura was a wrestling commentator and some kids ran in the ring to high-five Paul “Mr. Wonderful” Orndorff? Jesse had the famous quotation, “What’s he gonna do McMahon, piledrive the kid?”.
There are only 3 North American producers of structural steel (Chaparral, Nucor and Steel Dynamics) and the market isn’t going to fragment any time soon. With this industry consolidation has come the focus on profitability rather than capacity utilization. So the market is not oversupplied. Combine this with the weak US Dollar, higher international transportation costs and strong international demand and the threat of any imports flooding the market is minimized. Indeed, international structural steel prices have risen dramatically as well.
With office vacancies beginning to tighten, and highway construction making new opportunities for more office space, it’s likely that non-residential construction in the US is going to pick up. On the Gulf Coast, post-Katrina projects are being bid to get into the rebuild mold and these new projects will hit Chaparral’s books. Already CHAP’s backlogs are extremely high and they don’t expect them to change.
Consistent with all that, of course, will be the growing demand for structural steel. The piling business is still very attractive and the market is still growing. CHAP’s margins for piling are better than they are for the other products.
So it looks like the stars are lining up for old Chaparral. What does this mean when it comes to earnings? Chaparral Steel Company reported record net income for its first quarter ended August 31, 2006 of $59.1 million, $1.23 per diluted share. This represents an increase of $41.3 million compared to net income of $17.8 million ($0.39 per diluted share) for its first quarter of fiscal 2006 and is $2.9 million better than the previous record of $56.1 million ($1.16 per diluted share) set in the last quarter of fiscal 2006. Record operating profit of $96.7 million increased 176% compared to the first quarter of fiscal 2006 and exceeded the previous record set last quarter by $2.0 million.
Shipments of 567,000 tons were 6% less than the comparable first quarter and sequential fourth quarter of fiscal year 2006 due to reduced levels of inventory available for sale. Average selling prices for the quarter of $656 per ton increased over 27% and 7.5% from the first quarter and fourth quarter of last fiscal year, respectively. Metal margins of $454 for the quarter were 23% and 7.5% higher compared to the first and fourth quarters of last fiscal year, respectively. The Company ended the quarter with $290 million of cash, cash equivalents and short-term investments. The Company believes that end user demand for its products will remain strong and shipments will primarily be a function of production. Based on current market conditions, net income for the second quarter should be in-line with, to slightly better than, the first quarter and the Company remains optimistic for the remainder of the year.
ANAL-ysts are projecting a second quarter $1.26/share, $4.86 for the year and $4.81 for the next fiscal year. What does $$$MR. MARKET$$$ think? $$$MR. MARKET$$$ thinks that the ANAL-ysts have taken too many piledrivers to the head. While steel prices have come off of their summer highs, they are still 40% higher than they were in the summer of 2005. Based upon where global demand is today and where global prices are, there shouldn’t be much concern for CHAP concerning degradation in pricing. So any sustained prices at these levels are going to generate tons of free cash flow for CHAP and drive up its book value. Since they only plan on investing $25 million in CAPEX, there has to be some kind of big reward coming to shareholders in the near term.
The other thing to remember is that their Virginia plant was at only 71% capacity last quarter and it should run in the low 80’s for utilization for the year. More steel production…more profit. The average price for bar and beam in the first quarter (ending August 2006) was $656/ton. At the end of September, prices went to as high as $680. More production, at a higher price means more gross margin. Compound this with the fact that energy prices came off significantly since August, so production costs must have come down somewhat.
So you’re looking at production of close to 590,000 tons at a price of $680 per ton which would generate a revenue increase of about 10%. This revenue increase, combined with lower energy costs, will generate second quarter earnings of $1.41/share, and annual earnings of $5.33 per share. At today’s PE of 11.8, that would generate a stock price of $62.89, which is well past my sell price. Don’t forget that a share repurchase is certain to come, and that will also drive up share prices.
What does the boss think?
"This is our sixth consecutive quarter of earnings growth and we expect to continue similarly strong results as both domestic and international markets remain solid for structural products," stated Tommy A. Valenta, President and Chief Executive Officer. "Domestic prices for structural products remain competitive with global prices and based on global demand we should continue to maintain healthy margins."
That’s good news for me. Now it’s time for me to pump some steel. See you in the gym.
If you liked this write up, send it on to 4 of your friends. If you’ve read this far, email me back and let me know what you think of this stock pick.
If you like this stock pick, and it works out for you, please visit this site: www.golittletigers.com . These boys are always looking for some assistance from some kind hearted supporters. No donation is too small or too large.
I am HUGE!
$$$MR. MARKET$$$
http://www.mrmarketishuge.com